Board Compensation

Readers respond to William Schambra’s feature article “Board Compensation: To Pay or Not to Pay?”

As William Schambra points out in his article, “Board Compensation: To Pay or Not to Pay?,” there is no easy, absolute, universal answer to the question of whether to compensate foundation directors. Instead, there are persuasive—even compelling—arguments both for and against providing such compensation, which Schambra nicely summarizes. Additionally, the number of respected foundations that fall on either side of this question offer further evidence of the difficulty of determining the definitive “best practice.”

Context and factual considerations can substantially influence a foundation’s decision to compensate its directors. Did the donor communicate any direction or preference regarding director compensation? The corpus was, after all, the donor’s money. Do the directors devote such time and expertise that they effectively function as foundation staff? Are the foundation’s mission, programs, relationships, and strategies complex enough that directors are expected to have and use specialized knowledge and experience in the service of the foundation?

The reality is that even when two different foundations answer these questions exactly the same way, they may legitimately adopt different practices regarding director compensation. Neither of these hypothetical foundations should be vilified or idolized solely because of that decision.

Official pronouncements that suggest that there is one right answer can inadvertently harm the sector and the organizations within it-which is ironic, given that the pronouncements are intended to help. Such pronouncements can lead people to perceive an organization as poorly governed, mismanaged, or even abusive, in spite of evidence to the contrary. Such conclusory inferences can inappropriately damage reputations and prevent organizations from being as effective as they might otherwise be.

Universal standards regarding director compensation-what Schambra and others refer to as a “one-size-fits-all” approach-can weaken an organization’s autonomy by encouraging over-deference to perceived common wisdom. That deference can ultimately diminish a sense of responsibility for thoughtful, strategic decision-making, which would be detrimental to a sector charged with promoting civil society, economic growth, and human welfare. Unnecessary compromises to autonomy, independence, and ability to make responsible decisions should be resisted, except to the extent doing so addresses abuse not covered by existing laws and ensures that philanthropic and charitable purposes permeate the organization.

This is not to suggest that compensation, if provided, should be anything other than reasonable. Nor is it to suggest that such compensation should not be accurately reported to the government and the public. These requirements operate as healthy checks on temptation, ensure that charitable purposes remain paramount, and require reasonable transparency in exchange for tax-exempt status.

I found William Schambra’s recent essay to be compelling, and his findings are similar to the views I have formed over 30 years with the IRS and in private law practice. My sense is that boards composed of engaged individuals, particularly those with some financial or legal training, seem to deal more effectively with compliance challenges than do boards that lack such expertise. It seems intuitively correct that when an individual receives compensation, however nominal, there is a sense that greater commitment can be demanded of that individual. When an organization is paying for your services, you are more likely to devote personal time to board business.

Certainly those concerned about board effectiveness need to keep in mind the extraordinary diversity and complexity of the charitable sector, including private foundations, and the increasingly important legal responsibilities that attach to the position of director. A foundation director who is unfamiliar with the rules against self-dealing and taxable expenditures—not to mention a less than passing familiarity with the Form 990-PF—serves at increasingly greater personal and institutional risk. Those who bring such skills to the board may have other demands on their time, and offering some compensation, even nominal compensation, for their efforts solidifies the bond between them and the organization in a way that could reinforce, without supplanting, their philanthropic motivation.

The one fault that I find with the essay is its failure to note the logical fallacy inherent in the IRS’s definition of “reasonable compensation.” The IRS locates “reasonable compensation” in the mid- to low-range of comparable compensation data. That definition implies that the upper-range of compensation, anything above mid-range, is likely unreasonable and should be restructured downward. If such a reduction occurs as a result of the compensation analysis, the collective act lowers the mid-point in the next general assessment, and so on, until “no compensation” becomes the only “reasonable compensation.”

—Marc Owens
Caplin & Drysdale Chartered
Washington, D.C.

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William Schambra’s article on the merits of board compensation presents a good balance on an issue that has received ever more coverage in recent years.

At the Evangelical Council for Financial Accountability (ECFA), we deal primarily with public charities, but we accredit several private foundations, as well. Some folks would probably expect us to take the “one-size-fits-all” approach and conclude that foundation directors should never be compensated.

We believe the issue deserves more careful consideration than the casual comparison to the public charity sector would offer. May I suggest:

· For certain foundations, it may be reasonable and necessary to pay directors—just as it may be reasonable and necessary to pay public charity directors in certain situations. On the one hand, Congress should leave this issue to the wisdom and discretion of foundations. On the other hand, foundations should provide adequate oversight to determine that director fees are reasonable and necessary.
· The board of a foundation should look inward to determine whether director fees are reasonable and necessary, without regard to how other foundations address this issue. There seems to be a presumption in some corners of the foundation world that director fees should be paid without regard, in many cases, to whether the fees are reasonable and necessary-almost a presumptive “right to pay the fees.”
· Director fees are likely “reasonable and necessary” when the number of board meetings is relatively high, when the committee and/or field assignments are more significant than usual, and when the experience and qualifications for board service exceed the normal requirements. This definition would preclude director fees for many small foundations that meet twice a year with no unusual board service requirements. It leaves the door open for director fees at large and complex foundations, or foundations with extensive committee and/or field assignments. Between these two extremes lies a significant grey area, requiring board discretion.
· Foundations paying director fees should accept the same practice by their grantee organizations. In other words, if a foundation provides “reasonable and necessary” director compensation, it should not question the expenditure of charitable dollars for the same practice among its grantees. What’s good for the goose is good for the gander.
· Private foundations that want to change their status from private foundation to public charity will generally be well-served by refusing to pay director fees. As a private foundation solicits public support, it will often find that public support comes with an expectation of no, or very minimal, director fees being paid by the foundation soliciting funds.

Proper diligence by foundations on the issue of director fees will ensure strong foundation boards and minimal concern by regulators, the public, and the media.

I thought William Schambra’s piece on compensating foundation directors was thoughtful and well written.

There’s one additional reason which may militate in favor of compensating nonprofit directors. The federal Volunteer Protection Act, like similar acts in many states, exculpates volunteers from liability in many circumstances. Uncompensated directors thus have a much lower risk of being held liable for negligence (or violation) of fiduciary duties. Providing even minimum compensation eliminates this exculpatory protection, and is thus likely to increase the attention directors pay to fulfilling their fiduciary duties.

—Harvey P. Dale
University Professor of Philanthropy and the Law
New YorkUniversity
New York, New York

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William Schambra’s piece “Board Compensation: To Pay or Not to Pay?” in the latest issue of Philanthropy provides a comprehensive review of the various arguments for and against board compensation. It does not, however, accurately describe the position of Independent Sector and the Panel on the Nonprofit Sector on this important issue.

Over the course of its work, the Panel on the Nonprofit Sector, convened by Independent Sector in 2004 at the encouragement of U.S. Senate Finance Committee leaders, reviewed the research and literature discussed by Schambra, and much more. It solicited reactions from thousands of people from charities and foundations-including staff, board members, donors, and volunteers—through online communications and 15 town hall meetings across the country.

Some urged the Panel to recommend that boards should not be compensated, while others felt the Panel should not address the issue of board compensation at all. The Panel found that the vast majority of charities (what he refers to as “nonprofits”) and foundations do not compensate board members, but identified reasons why larger, more complex institutions find it helpful or necessary to do so.

After serious deliberations, the Panel concluded, as it noted in its June 2005 report to Congress and the charitable community, that while it “generally discourages payment of compensation to board members by charitable organizations,” there could be good reasons why a nonprofit organization would choose to provide compensation. The Panel therefore went on to recommend that “in cases where compensation is deemed necessary due to the complexity of the responsibility, the time commitment involved in board service, and the skills required for the particular assignment, among other factors, charitable organizations should review information on compensation provided by organizations comparable in size, grantmaking or program practices, geographic scope, location, and with similar board responsibilities to determine the reasonableness of any compensation provided to board members.” That position was reexamined and affirmed by the Panel and its Advisory Committee on Self-Regulation in the recently issued Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations.

This recognition that charities and foundations do not all have the same circumstances, and therefore may come to different conclusions on board compensation, appears to us to be very similar to the one taken by Schambra. It is therefore not accurate to characterize the position of the Panel or Independent Sector as imposing on charities and foundations a “one-size-fits-all” approach to board compensation, or to any other issue. In fact, the Panel clearly states in the introduction to its Principles for Good Governance and Ethical Practice that “given the wide, necessary diversity of organizations, missions, and forms of activity that make up the nonprofit community, it would be unwise, and in many cases impossible, to create a set of universal standards to be applied uniformly to every member.” Rather, the Panel recommends that the board of every charitable organization consider this issue and its other recommendations carefully to determine what practices will best enable their organization to achieve its charitable purposes. Readers can judge for themselves by viewing the principles at www.nonprofitpanel.org.

—Diana Aviv
President and CEO
Independent Sector
Washington, D.C.

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Regarding William Schambra’s article, the National Center for Family Philanthropy does not take a position for or against board compensation. Schambra incorrectly names the Center among the “critics [who] believe that foundations that pay their own trustees . . . stand guilty of hypocrisy and double standards.”

When he uses my words from a Jan/Feb 2001 Foundation News and Commentary article, he incorrectly refers to the views of our “members”—the Center is not a membership association—when, in fact, I was referring to a view held by some foundation “leaders.” Using an incomplete quotation from an old publication creates the mistaken impression that the Center opposes board compensation. We hold the position that any foundation policy or practice, including board compensation, should help the foundation further its mission, values, and charitable goals.

Some foundations may choose to offer board compensation to recognize the extraordinary service of individual trustees, to encourage participation of younger family members and branches of the family that are less financially secure, or to attract committed and experienced non-family members to the board. Others choose not to compensate because they are concerned such a practice might go against the founder’s wishes, might put the foundation in an unfavorable light, or might introduce a new set of financial issues that could be a source of tension. Finally, as I indicated in the 2001 quote, some foundations find it inconsistent to pay their own boards when the boards of the nonprofits they fund serve voluntarily.

The National Center for Family Philanthropy exists to help donor families deal with complex issues. Implying that we have taken a one-sided approach to this issue endangers our credibility as an unbiased source of research and information. We would be happy to provide a complimentary copy of our comprehensive issue paper on board compensation to any of your readers.

—Virginia M. Esposito
President
National Center for Family Philanthropy
Washington, D.C.